Chingo De Dinero

Is the Federal Reserve part of the Government?

In school we all learn that there are three parts of the Government; legislative, judicial, and executive.  So, just check the Fed, and determine if it belongs to one of the parts, if not, it is not Governmental.  It belongs to none, answer found.

Not so fast, the Government is always making things complex, this included.  The Fed was started in 1913 by the federal reserve act, from the legislative and approved by executive.   The Board of Governors are appointed by the president.  Sounds pretty governmental to me.  But, if that is not enough for you, they are in charge of the money supply.  That’s right, they make US dollars!!!!!!!!

Although the Fed is not clearly governmental, I think it is safe to say they are the government.

This past week the Fed mentioned they would purchase 300 MUSD in Treasuries, big deal, can’t impact me much, right?  Not really, the first thing you have to understand is to buy the 300 MUSD in Treasuries the Fed needs to pay…how do they do this, they “make” the money.  Yeah, that’s right, they just make the money.  Can they do this, why not?  They are in charge of the money supply.

So, now that you know how the Treasuries are bought, what is the effect?  Well, now there are 300 MUSD more dollars out there.  This money trickless down to people and given the great consumers we are, it will be spent.  With more people spending, sellers of goods can raise price.  BAM, inflation.  Will 300 MUSD alone cause inflation, no, but coupled with a lot of other factors, we could be in for some trouble.

What really gets to me is how I interpret this response to help the economy…spend our way out of it.  This can work in the short term, if not abused, but when you do it over and over and over, people are going to smarten up and stop selling, because in the end they are never going to actually get their return.  The easiest way for this to happen is a depreciation in the dollar vs other countries, which keeping Dollar output constant will result in losing ground vs others.

Of course, other countries are doing the same stuff, so relative we may be better off, none the less I would like to take the pain now, adjust consumption to what we really value, a shift the economy to improve this type of production.  The market is amazing efficient at this, especially compared to the government.

In looking at my stock quotes during the day, I could not help but to notice a large drop in price, but green being shown for the daily change.  The stock NCTY, traded at 16 on 1/28/2009, but then the following day traded in the low 15s, but showed an increase.  The reason, a $1.1 per share cash dividend.

It is amazing how this is factored in perfectly, so the true gain or lose are shown.  Basically, to ensure arbitrage is not present, a stock should drop by the same amount of its dividend, if not, you could buy right before the dividend, then sale right after, and pocket the dividend.  This also has to do with the term fair value used in pre-market figures.  It takes the previous day’s closing price and makes adjustment to show the actual change.

So, if you ever wonder why the stock price is down, but Google or Yahoo are showing an up, look at the dividend.